EPA proposal, advanced biofuels industry’s “worst nightmare”

The EPA will hold a public hearing on its proposed reduction of 2014 volume requirements tomorrow, and has established a 60-day comment period). In preparation, the Advanced Biofuels Association held a teleconference today, addressing concerns about what this could mean to future investments in the advanced biofuels industry.

EPA has proposed 2.2 billion gallons as the volume requirement target for advanced biofuels in the Renewable Fuel Standard (RFS) for 2014. This is the industry’s “worst nightmare,” said Michael McAdams, president, Advanced Biofuels Association (ABFA) in a teleconference today. The 2.2-billion gallon requirement is a 20 percent reduction from the 2013 advanced biofuel requirement of 2.75 billion gallons and more than a 40 percent cut from the 3.75-billion gallon mandate originally contemplated by Congress when it enacted the RFS.

The proposed reduction, McAdams said, “is a blow to those companies that are raising capital and producing advanced biofuels.” Approximately $14 billion has been invested in the advanced biofuels industry over the last six years, he said. The recent EPA proposal “will chill further investment,” McAdams added.

Wayne Simmons, president and CEO, Sundrop Fuels, and chairman of the ABFA, said that the industry cannot grow without financing. “It’s a capital intensive industry and lenders are risk averse.” He added that Renewable Identification Numbers (RINs) are attached to each gallon of renewable fuel produced, and that the value of these RINs is set by the market based on supply and demand. When the EPA sets the Renewable Volume Obligation (for parties required to participate in the RFS) less than the supply, the economic incentive to blend biofuels disappears as does the opportunity for the advanced biofuel industry to grow.

Pavel Molchanov, senior vice president and equity research analyst, Raymond James & Associates, Inc., pointed out that EPA sets volume targets at the beginning of each year. The targets for 2014 are coming down, “a first for EPA,” Molchanov said. “If there is a mandate and it is set aside, it’s not much of a mandate. The stability and credibility of [this] policy is not ideal,” he added.

The EPA will hold a public hearing on its proposed reduction of 2014 volume requirements tomorrow, and has established a 60-day comment period (ending on January 28, 2014).

McAdams says the ABFA will focus on three main points in arguing against the EPA’s proposal.

First, it will point out that the proposed reduction to the advanced biofuel requirement is disproportionate to other biofuels. While the EPA is cutting volume requirements for advanced biofuels by more than 40 percent (from the original RFS statute), it is proposing to reduce volume requirements for conventional biofuels (such as corn ethanol) by less than 10 percent. He suggested that advanced biofuels are primarily drop-in fuels which are compatible with existing fueling infrastructure, are immune from the so-called “blend wall” and reduce greenhouse gases by 50 percent (the latter point is a key reason for the RFS).

Second, McAdams said that EPA’s proposed methodology for establishing upcoming RFS targets looks at the average of historical data rather than looking forward to future production levels.

Third, ABFA contends that the EPA proposal “leaves low-hanging fruit by setting consumption targets below available levels of advanced biofuels plus carryover RINs.” McAdams said that EPA itself predicts up to 3.23 billion gallons of advanced biofuel will be available in 2014. The ABFA says that it conservatively forecasts the advanced biofuels industry to generate at least 3.2 billion RINs in 2013, exceeding this year’s target by at least 500 million gallons and generating carryover RINs.